Why Investors Shouldn't Be Surprised By CSW Industrials, Inc.'s (NASDAQ:CSWI) 32% Share Price Surge

CSW Industrials, Inc. (NASDAQ:CSWI) shareholders have had their patience rewarded with a 32% share price jump in the last month. The annual gain comes to 111% following the latest surge, making investors sit up and take notice.

After such a large jump in price, CSW Industrials' price-to-earnings (or "P/E") ratio of 56.8x might make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 18x and even P/E's below 10x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

CSW Industrials certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for CSW Industrials

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How Is CSW Industrials' Growth Trending?

CSW Industrials' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. The latest three year period has also seen an excellent 107% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 22% during the coming year according to the three analysts following the company. With the market only predicted to deliver 15%, the company is positioned for a stronger earnings result.

With this information, we can see why CSW Industrials is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Shares in CSW Industrials have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that CSW Industrials maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 1 warning sign for CSW Industrials that we have uncovered.

If these risks are making you reconsider your opinion on CSW Industrials, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.